Democrats Debate Where to Draw the Line in the Sand with Bush Tax Cuts

As you may have heard several thousand times over the past few years, President Obama would really like to see the Bush tax cuts expire at the end of the year for America’s wealthiest taxpayers, arbitrarily identified as those with taxable income in excess of $250,000. Should this occur, the top two tax rates for those above the threshold would return from the present-day 33 and 35% to 36 and 39.6%. The current rates for those earning less than $250,000 would remain at 10, 15, 25 and 28%.

One would have to think that Pelosi’s proposal is a bit of election-year gamesmanship. Democrats have long maintained that the reticence of their Republican counterparts to allow the Bush cuts to expire has far more to do with protecting the tax rates of the nation’s wealthy than it does a desire to reduce the deficit. By raising the cutoff for the expiration of the reduced rates from $250,000 to $1,000,000, Pelosi likely believes she can back Republicans into a corner: if they still refuse to embrace the cuts at the higher level, Pelosi and other Dems will paint their counterparts as aligning with the nation’s millionaires at the risk of punishing the middle class.

To the surprise of no one, Pelosi’s plan was largely panned within her own party, with many Democrats claiming her plan would raise far less revenue than the Obama proposal, while also representing a windfall for many households earning $1 million, because they would get the benefit of reduced graduated rates on their income up to $1 million.

That sounds like a hefty difference, but then again, to put it in perspective, by merely extending the 2% payroll tax reduction through 2012, Congress was willing to tack $100 billion on to the deficit. So who knows: perhaps those in Congress would view sacrificing $360 million over 10 years in order to avoid the expiration of the Bush tax cuts for all taxpayers as money well spent.

The items in this blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation. A select group of Tax Professionals of WithumSmith+Brown write Double Taxation, and any opinions expressed or implied are not necessarily shared by anyone else at WithumSmith+Brown.

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